More Of The Best Long Term Dividend Stocks

| October 5, 2015 | 0 Comments

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Last month, on a rare rainy morning in Southern California, I headed up I5 toward LA.

The traffic clogged at Del Mar.  Looking off through the gray dawn at the racetrack I thought about its honored guest, 2015 Triple Crown Winner American Pharoah.

American Pharoah is the first horse to win the Triple Crown since 1978.

And this achievement got me thinking about what was going on back in 1978, which was not one of the market’s better years.

The Dow started off at 831 and wound up at 805.

But dividend investors made out fine.  S&P 500 stocks paid an average yield of 5.39%.

Which just goes to show that down markets don’t hurt as much when the dividends are rolling in.

And as markets sputter, dividend stocks will be able to soften the blow of lower share prices because of the dividends they pay.

Dividend stocks hold up better when the market goes down.

Look at 2008… The Standard & Poor’s 500-stock index took a 37% hit.

But the S&P 500 Dividend Aristocrats only went down by 22%.

The S&P 500 Dividend Aristocrats have been growing their dividends for the past 25 years.

But enough of 1978 and 2008.  Let’s pay our respects to Triple Crown Winner American Pharoah and try to make some sense of 2015.

One of the key questions we should ask is…

“Are The Best Long Term Dividend Stocks Too Expensive?”

Well, they’re definitely not cheap, especially when it comes to the S&P 500 Dividend Aristocrats.

But now and then you can even find the Dividend Aristocrats on sale.

You pay for quality.  That’s pretty much a given.

You’re not just buying income, but you’re depending on the company’s ability to consistently grow the dividend year after year.

After all, dividends aren’t much good if you can’t count on them to keep rolling in.

Are there traps you should watch out for?

Definitely.  One of them is investing in a stock where the company’s products might not make it through a rough stretch.  Even though you’re investing for the long-term, you’re going to hit cycles.

Just ask a gold miner or a homebuilder.

Right now, we see down cycles with energy companies and the big global banks.

But peel back the layers and look more closely.  Don’t lump every stock in the same basket and you’ll turn up some interesting opportunities in bank stocks.

Why The Right Small Banks Can Be Some Of The Best Long-Term Dividend Stocks

Look carefully and you’ll discover there are still some smaller, regional banks that have been able to keep growing their dividend for the past ten years.

When Bank Of America $BAC and JP Morgan Chase & Co. $JPM stumbled and cut dividends a few years back, a handful of smaller banks weathered the storm.

If you are looking for the best long-term dividend stocks and you’re not too fussy about growth, small banks offer some interesting opportunities.  These probably aren’t stocks where you’ll pile up capital gains because the share price likely isn’t in a position to grow.

And keep in mind that even though small banks have made it through the financial meltdown, they’re for the most part battered and bruised.

This is a business of the weak and the strong, the hunters and the hunted.  Don’t be surprised to see consolidation.

But business fundamentals are improving.  Loan quality looks to be growing stronger.

Here are 3 small bank stocks that pay dividends:

  • 1st Source Corporation $SRCE
  • Bank Of The Ozarks $OZRK
  • Commerce Bancshares $CBSH

1st Source Corporation $SRCE pays a 2.06% dividend yield.  It’s been growing the dividend for 29 years and the Dividend Payout Ratio is 30.4%.

Bank Of The Ozarks $OZRK pays a 1.23% dividend yield.  It’s been growing the dividend for 4 years and the Dividend Payout Ratio is 27.34%.

Commerce Bancshares $CBSH pays a 1.87% dividend yield.  It’s been growing the dividend for 46 years and the Dividend Payout Ratio is 33.1%.

The Right Price To Pay

Right off the bat you see that Bank Of The Ozarks got in trouble a few years back and had to cut the dividend.

Why invest in $OZRK with its skimpy 1.23% yield when it’s only been growing dividends for the past 4 years?

When you compare it to Commerce Bancshares and 1st Source Corporation, it comes in a distant third.  Not exactly Triple Crown material.

Bank Of The Ozarks is expensive with a P/E ratio of 27 and it’s trading right now near its 52-week high.  But earnings are strong and it’s making acquisitions.

What about Commerce Bancshares and 1st Source Corporation?

Commerce Bancshares has also been trading near its 52-week high.  But the P/E ratio is good, just a sliver over 18.

The same story for 1st Source Corporation, but an even lower P/E at 14.

And this raises an interesting question.  If you’re trying to decide between 1st Source Corporation and Commerce Bancshares, do you use the lower price earnings ratio as your tiebreaker?

There can always be different reasons for a low P/E ratio.  Maybe the stock is undervalued by the market for no good reason.  Maybe it’s undervalued because nobody’s terribly excited about its future.

In the case of  1st Source Corporation with a low P/E of 14 , you’ve got the classic case of a stock that’s flying under the radar.  It’s followed by just one analyst.

Dividend Stocks Chart 1st Source Corporation $SRCE

But why not invest in both?  Diversifiy your risk.

Just don’t load up on too many small bank stocks.  The sluggish economic recovery means the loan portfolios could still trigger a few surprises, even with examiners keeping a watchful eye on things.

And as for the price you pay for the best long-term dividend stocks…

Strike a balance.  Be just as concerned about paying too little as paying too much.


Paul Duke

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Category: Best Dividend Stocks

About the Author ()

Paul “Dividend” Duke is a veteran investor with a longstanding interest in dividend stocks. He brings a balance of both technical and fundamental analysis to his work, and focuses on opportunities that provide safety, capital appreciation, and income.

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